Saudi Aramco seeks refinery partners

As Saudi crude oil production increases in line with OPEC quotas and rising global demand, Riyadh and Saudi Aramco have decided that now is an opportune moment to embark on a new refining venture. The state-owned company has announced plans to construct a new oil refinery at Yanbu to be fed by heavy crude oil.
As part of its strategy to retain more of the profits of the lucrative processing stage of the oil industry within the country, the company hopes to build a new 400,000 bpd facility on the Red Sea. The Saudi firm is looking for partners to help provide the $ 4-5 bn development costs of the plant, although it intends to retain a majority 70 % stake in the venture.

According to Saudi Aramco's vice-president, Khalid Al Buainain, the refinery will target three specific markets: European low sulphur diesel, East Asian naphtha and US “high quality” petrol.
Existing refineries process around 100,000 bpd of heavy crude, although they are capable of handling up to 450,000 bpd. It is most likely that a single foreign partner will be selected, given that Saudi Aramco already operates two joint refining ventures with a 50 % stake in each: The 400,000 bpd Samref facility, which is also located at Yanbu, with ExxonMobil; and the 320,000 bpd Sasref plant at Jubail with Shell.

The bulk of Saudi Aramco's share of production at the two domestic joint ventures is distributed domestically and comprises diesel oil, gasoline and fuel oil, although there is also some asphalt, liquefied petroleum gas (LPG) and aviation fuel output. India's Hindustan Petroleum Corporation Limited (HPCL) says that it has held talks with Saudi Aramco on taking a stake in the refinery.
HPCL has already offered Saudi Aramco a stake in the Vishakhapatnam refinery in India, which is currently undergoing an expansion programme that will result in a 300,000 bpd refining capacity. The Indian Oil Corporation also hopes to enlist the Saudi firm in the development of the 180,000 bpd Paradip refinery.

As a result of the country's rapidly rising oil consumption, the Indian government has asked local oil and gas companies to increase their interests in overseas upstream projects and to boost national refining capacity. In an effort to strengthen relations with Saudi Arabia, India's new oil minister, Mani Shankar Aiyar, and the chairman of HPCL, M.B. Lal, visited the kingdom in March.
A spokesperson for the Indian oil ministry confirmed: "They [Saudi Aramco] are very keen to involve Indian firms in the new refinery, while we want to invest in Saudi Arabia to strengthen our relationship. We depend heavily on Saudi crude oil."

The kingdom's oil pipeline network is already set up to transport huge volumes of crude oil to Yanbu, so little investment in a new pipeline infrastructure will be required. The city's oil export terminal can ship up to 5 mm bpd, which is of particular strategic importance bearing in mind that security problems with Iraq and Iran have curtailed operations at the kingdom's Gulf terminals.
Nevertheless, the offshore 6 mm bpd Ras Tanura terminal is likely to remain the country's primary means of exporting oil. East Asia is already by far the kingdom's most important export market, both in terms of crude oil and refined petroleum products, and tankers face an additional five day journey to China, Japan or India when leaving from Yanbu, in comparison with Ras Tanura.

Saudi Aramco has already dedicated around $ 2 bn to upgrading its existing plants and is considering investing up to $ 3 bn more in expanding the Ras Tanura refinery, the oldest facility in the country, as well as constructing a petrochemical plant at the site.
In August 2003, the completion of the new fractionation unit at the Ras Tanura refinery boosted capacity by 200,000 bpd and transformed the installation from a simple hydro skimming refinery to a full conversion operation. At present, however, Saudi Arabia continues to export most of its oil production as crude oil for refining elsewhere in the world as its eight domestic refineries only have combined capacity of 2.1 mm bpd.

Aramco will also modernise and expand the Rabigh refinery in a $ 7 bn joint venture with Japan's Sumitomo Chemical Group, which will include the construction of an associated petrochemical plant.
The contract to upgrade Rabigh was signed in May 2004 and final capacity of 400,000 bpd is likely to be brought on stream by 2008, including technology that will allow the production of kerosene and gasoline. The petrochemical plant, which will be fed with natural gas from the Eastern Province, will produce propylene and ethylene and is scheduled for completion in the same year.

Apart from increasing domestic refining capacity, the government has been keen for Saudi Aramco to expand its overseas interests. The company participates in four marketing and refining joint ventures overseas, with stakes ranging from 35 % to 50 % in Star Enterprise of the US, Petron Corporation of the Philippines, South Korea's Ssangyong Oil Refining Company and Motor Oil (Hellas) in Greece.
The four joint ventures boast six refineries between them and have a total processing capacity of 1.6m bpd. Saudi Aramco has also purchased a 10 % stake in the marketing and refining Showa Shell Group in Japan. As part of the deal, the kingdom will supply Showa Shell with 300,000 bpd of crude oil.

In addition, the Saudi government and Saudi Aramco have offered to help set up more refineries in the US and elsewhere in the industrialised world, in an effort to expand capacity in the global oil sector as a whole. The petrochemical facilities being added to several domestic refineries should help the kingdom retain its position among the world's most important petrochemical producers.
SABIC's Yanbu plant, already one of the world's biggest polyethylene facilities, will be expanded even further by Italy's Snamprogetti Construction. SABIC plants account for around 11 % of global petrochemical production and the company is expected to strengthen its position over the coming decade as a result of a series of major projects.

In recent years, Saudi Aramco has diversified away from its traditional reliance on upstream oil and gas activities. Increased investment in refining capacity has transformed the company into the world's sixth biggest refiner.
Nevertheless, the company still refines only a fraction of its crude oil production, whether within Saudi Arabia or overseas. Sustained high oil production over the years to come will almost certainly necessitate greater global refining capacity, so the company is right to embark upon a programme of increasing its own capacity. Perhaps the greatest surprise is that it has taken the kingdom so long to get this far.